Comparing Offers When the Highest Bid Has the Weakest Loan

You have two offers on the table and the higher one feels like the obvious choice. It is $13,500 above the other, the buyers wrote a nice letter, and your agent is ready to send a counter. Then you read the attachments. The higher offer is an FHA loan with 3.5 percent down and a pre-approval letter dated eleven weeks ago. The lower one is a conventional loan with 20 percent down, a letter from last Tuesday, and a 21 day financing contingency.

Sellers get burned here more often than they realize, because the price is the only number printed in large type. A deal that falls apart on day 27 does not just cost you the difference between offers. It costs a month of mortgage payments, a relisting that shows the house came back on the market, and buyers who now ask what went wrong. I spent six years underwriting loans before I represented buyers, and the paperwork behind an offer tells you more about whether it closes than the headline price does.

Why a bigger number can be the weaker offer

An offer is a promise to pay, conditioned on things outside the buyer's control. The two conditions that break most deals are the appraisal and the loan approval itself. Price matters only if the deal survives both.

The appraisal is where low down payment loans get fragile. If the house appraises below the contract price, the lender will only lend against the appraised value. A buyer putting 20 percent down has room to cover a shortfall by putting a little less down. A buyer stretching to 3.5 percent usually does not, because that 3.5 percent was most of their savings to begin with.

FHA and VA loans add a rule that many sellers have never heard of. FHA contracts must include an amendatory clause, which lets the buyer walk away with their earnest money if the appraisal comes in below the price. VA loans carry a similar escape clause. In plain terms, that higher offer has a built in exit if your price was ambitious.

FHA appraisers also check the property against minimum standards. Peeling paint on a house built before 1978, a missing handrail on basement stairs, or a roof with less than a couple of years left can trigger required repairs before closing. Those are fixable, but someone has to fix them, and that someone is often you.

Reading the pre-approval letter like an underwriter

Most sellers glance at the letter, see a loan amount above the offer price, and move on. The letter says far more than that if you know where to look.

• The date. Credit reports used for approval generally go stale after about 90 to 120 days depending on the lender and loan program. A letter older than eight weeks suggests the buyer has been searching for a while, which is fine, but it also means the lender may need to pull credit again.
• Pre-approved or pre-qualified. Pre-qualification is often based on what the buyer said about their income. Pre-approval should mean someone looked at pay stubs, tax returns and a credit report. Some letters use the words loosely, so the next point matters more.
• Who signed it. A named loan officer with an NMLS number and a direct phone line is a good sign. A generic online letter with no person attached tells you very little.
• The loan program and down payment. If the letter does not state them, your agent should ask.

The single most useful thing you can do is have your agent call the loan officer. Ask whether the file has gone through automated underwriting, whether income and assets are already documented, and whether anything is still outstanding. Loan officers answer these questions all day. A confident, specific answer is reassuring. A vague one is information too. I wrote more about the parts of a file buyers never see in what underwriters check behind the scenes, and the same checklist works from the seller's chair.

The two offers, side by side

Here is the comparison from the opening, using a house listed at $405,000 that appraises at $401,000. This mirrors the kind of spread I saw several times a year while underwriting.

With Offer A, the buyer now needs $11,000 in extra cash on top of the down payment and closing costs, or you need to drop the price, or both of you split it. The amendatory clause means the buyer can simply leave if no one agrees. Realistically, Offer A lands somewhere around $401,000 to $405,000 after the appraisal, and that assumes no repair requests.

Offer B, at $398,500, looks smaller by $13,500 on paper. After the appraisal plays out, the real gap may be $3,000 to $6,000, and Offer B has three times the earnest money at stake, which tells you the buyer intends to close.

None of this means FHA buyers are bad buyers. Plenty close smoothly, especially when the price sits comfortably within recent sales. The risk shows up when your list price is at the top of the range, which is exactly when sellers tend to favour the highest bid.

Ways to keep the higher offer and lower the risk

You do not have to reject Offer A. You can counter with terms that address the weak spots:

• Ask for an appraisal gap clause, where the buyer agrees to cover a shortfall up to a stated amount, say $6,000, in cash.
• Request a shorter financing contingency, 21 days instead of 30, with written updates from the lender at day 10.
• Ask for a fresh pre-approval letter dated this week, which forces the lender to confirm the file is current.
• Raise the earnest money. A buyer who will not move from 1 percent to 2 percent is telling you how committed they are.

How much leverage you have depends on how many offers you received and how long the house has been listed. If you priced it carefully from the start, as covered in pricing a home right the first time, the appraisal risk shrinks on every offer, not only the FHA one.

Before you accept anything this week

Ask your agent for every offer's pre-approval letter, loan type, down payment and contingency dates, and put them in one table like the one above. Then have your agent call each buyer's loan officer with the three questions about underwriting, documentation and outstanding conditions. That call takes ten minutes per offer. It is the cheapest insurance you will buy during the whole sale, and if you want a broader view of the process, the selling section walks through the stages that come after acceptance.